Socially Responsible Supply Chain Business Essay


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Between June 2007 and June 2012, twenty Foxconns employees committed suicides with fourteen deaths, causing Apple receive significant criticism for its failure to oversee its Chinese supplier. As competition is getting more intense and protecting the reputation and brand image of the firm is receiving more attention, firms are getting more concerned about the risk of punishment by consumers and others for socially irresponsible behaviors. Collaboration has been widely prescribed as a remedy to address concerns regarding the social aspect of relationships in supply chain; however emergence of social responsibility scandals such as those in Foxconn implies that this universal remedy may not be enough to warrant socially responsible operations. This research conceptualizes the antecedents of social responsible governance structure in buyer-supplier relationship from buying firm's perspective. The research also suggests separating governance structure into social and economic dimensions better incorporates social-specific attributes of the relationship in governance structure design.


Foxconn is one of the leading manufacturers supplying to big names such as Apple, Dell, HP, Motorola, Nintendo, Sony and Nokia. Between June 2007 and June 2012, twenty Foxconn employees committed suicide with fourteen deaths [1] . While some experts argue that employees were treated relatively well at Foxconn, news reports have criticized long working hours, discrimination of Chinese workers by their Taiwanese coworkers, and absence of working relationships in Foxconn factories. As the tragedies at Foxconn outspread, Apple received significant criticism for its failure to oversee its Chinese supplier. Besides, Foxconn's behavior was not ignored by the stock market and Hon Hai's stock price dropped by 24% in 2010 (Eccles et al, 2012).

Today being socially responsive is not the domain of small niche companies any more. As competition tightens, being socially responsive is getting more importance for all businesses. Nike has long been boycotted due to sweatshop conditions in its Asian suppliers' factories. It took more than 10 years for Nike to fix its damaged reputation. While competition is getting more intense and protecting the reputation and brand image of the firm is receiving more attention, firms are getting more concerned about the risk of punishment by consumers and others for socially irresponsible behaviors. According to the Social Investment Forum, in 1999, assets in socially responsible portfolios reached US$ 2.2 trillion (Statman, 2000). A survey showed that 54% of Americans and 60% of international consumers believed that social performance is important for evaluating a firm (Cazier et al., 2006).

Some researches in the field of environmental supply chain management have argued that effective social SCM needs close collaboration and integration between actors in the supply chain, (Bowen et al., 2001; Gold et al., 2010; Hall, 2000; Mont and Leire, 2008; Seuring and Müller, 2008; Vachon and Klassen, 2008). Actually this approach has many potential advantages, including the ability to better control what goes on in the supply chain with respect to environmental and social impacts, and facilitating using a better insight into each other's operations as a base for environmental product and process innovation. However emergence of new social responsibility scandals in highly collaborative supply chains such as those at Apple's manufacturer, Foxconn, demonstrates that this universal remedy for governance of social aspect of relationships cannot necessarily warrant expectations. Review of the relevant literature shows that governance structure and its antecedents have not been much studied in context of sustainable supply chain management (SSCM) yet. This research attempts to fill this gap through conceptualizing a model by application of the management theories and concepts discussed in the relevant literature. The research contributes to sustainable supply chain management literature by providing insights into the dynamics of governance structure design. In this research first a literature review is performed and then theoretical background is discussed, then a conceptual model is presented and an example is discussed. Finally a conclusion is made and some opportunities for future research is proposed.

2. Sustainable Supply Chain Management

Supply management function is receiving more attention by scholars, as it plays an important role in tackling environmental and social issues upstream in the supply chain and in ensuring compliance with sustainability criteria.

Social and environmental concepts has evolved to the sustainability notion, through the concept of social responsibility and from standalone fashion where there was little or no recognition of the connection among themes such as the environment, diversity, human rights, philanthropy, and safety (Carter and Easton, 2011). Carter and Jennings (2002) and Murphy and Poist (2002) are among the earliest whose work has viewed these standalone activities within corporate social responsibility (CSR) concept. Carter and Jennings (2002) applied Carroll's (1979, 1991) hierarchy model to merge the standalone supply chain management activities with the context of social responsibility. Murphy and Poist (2002) also incorporated the standalone activities within social responsibility concept suggesting that socially beneficial results and economically beneficial ones should be tied together. Carter and Rogers (2008) used Elkington's (1998) notion of triple bottom line and identified four supporting facets, or facilitators of sustainable supply chain management, namely strategy, risk management, transparency and organizational culture which as shown in Fig. 1 . In defining the notion of sustainability in supply chain Seuring and Muller (2008) argued that material, information and capital flows should be managed to achieve goals from all three dimensions through collaboration among supply chain companies.

ImageFigure 1Sustainable supply chain management

Figure 1 Sustainable supply chain management

While having collaborative approach to supply chain management rather than maintaining arm's length and/or adversarial relationships has been argued to have benefits (Araujo et al., 1999; Preuss, 2005a) such as more effective governance and access to more sources of inter-organizational competitive advantage (Dyer and Singh, 1998), it also has been argued to be beneficial from social and environmental perspective. Kogg and Mont (2012) argue since the process of building a collaborative relationship between buyer and suppliers often prescribes a reduction in the number of suppliers, this approach enables actors to better control what occurs in the supply chain from the perspective of environmental and social impacts and use a better insight into each other's operations as a base for innovation in environmental product and process. However, recently some authors have started to question the lean approach (which is based on strong and effective relationships and operational integration) to SCM as a universal resolution to maximize efficiency and effectiveness and achieve environmental or social objectives in the supply chain (Kogg, 2012). While critics consent that inter-organizational collaboration and integration could be rewarding for the focal company, they argue that the buying company will do best to develop different types of relationships with different categories of suppliers (Araujo et al., 1999; Cox et al., 2001; New et al., 2002; Szandtner et al., 1997). Frohlich and Westbrook (2001) and Simatupang et al. (2004) found that companies still employ different approaches to sourcing and procurement with different levels of integration. Fawcett and Magnan (2002) evidenced that few companies are extensively involved in supply chain integration spanned over several tiers of the supply chain while many have no idea what their supply chain looks like beyond the first tier.

Kogg and Mont (2012) argue that the advocates of lean supply chain management have principally underestimated the impact of power relations in supply chains, possibly since practicing power may be disadvantageous to inter-organizational collaboration and trust. However other scholars to the field argue that power relations can have an essential impact on defining effective supply chain management practices (Cox et al., 2002). Cox et al. (2003) illustrated that a collaborative approach to sustainable supply chain management might only be possible when the relative power between the focal company and its supplier is favorable to successful inter-organizational collaboration. This implies that collaboration is only possible in certain situations.

3. Theoretical Background

3.1Transaction Costs Theory

According to Williamson (1996) governance structures refers to an institutional matrix within which transactions are agreed and executed. So supply chain governance is an institutional framework in which transactions are practiced. Transaction Cost Economics (TCE) is an important theory which is highly related to the concept of governance structure. TCE origins from two areas of research: new institutional economics and economics of organization (Williamson, 1991, 1993a, b, 1998). According to polar concept of Williamson (1991), governance structure is a continuum with two extremes of spot markets, where price determine transactions and hierarchy. Between these two extremes there are various hybrid forms of governance. According to TCE, the nature and level of transaction costs is the main determinant of governance structure. Transaction cost is determined by the extent of uncertainty, asset specificity and transaction frequency. An essential construct in TCE theory is contract. Classical, neoclassical and relational are three types of contract (Macneil, 1978, 2000). Classical contract law involves self-liquidating transactions and is anchored in a set of institutional rules with formal documents. Neoclassical contracts provide flexibility in longer-term economic relations through incorporating additional governance devices such as arbitration. Relational contracts are basically agreements which limit the exchange partners' arrangements (Frank and Henderson, 1992). Using Macneil's contracts classification, Williamson (1996) proposed a framework (Fig.2) which connects governance structures to transactions. As per the framework, market governance often occurs in the spot market where investment is non-specific and demand and supply is determined by price. Contractual governance refers to an occasional transaction practiced under written agreement between buyers and supplier with mixed or idiosyncratic investments. Relational governance is defined as recurrent transactions conducted based on long-term relationships which involve mixed or idiosyncratic investments. Therefore, two main forms of business governance are contractual and relational governance.

Investment Characteristics





Market Governance

(classical contracting)

Trilateral Governance

(Neoclassical Contracting)


Bilateral Unified Governance Governance

(Relational Contracting)

Figure 3. Matching governance structures with commercial transactions (Williamson, 1996)

3.2 Trust

In Macneil's relational contracting theory (1978), governance structure is extended to relationships which engage shared norms and values. Trust is a key concept in this type of governance. According to Rousseau et al. (1998) trust is "a psychological state comprising the intention to accept vulnerability based upon positive expectations of the intentions or behavior of another''. Trust is evidenced in different forms and may have different origins. Goodwill trust and competence trust are two major types of trust (Sako, 1992). Goodwill trust refers to the expectation that another party will behave in favor of the relationship, even if it is not in the other's favor to behave so, and fundamentally relate s to not acting opportunistically. Capability trust refers to expectations regarding another party's competencies to do a task properly. From trust origin perspective, Rousseau et al. (1998) distinguish three types of trust namely calculus based trust, relational trust and institution-based trust. Calculus-based trust focuses on credible information about another party's goodwill and competencies gained through network relationships. Relational trust derives from repeated interaction and is often emerges in relationships with a long-lasting interaction history (Kale et al., 2000). Relational trust cannot simply be created and should be built over time through taking risk consciously and interacting repeatedly (Das & Teng, 1998). Saxton (1997) argues that repeated interaction enhances concerns and commitment regarding the outputs of the relationship, and lessens the risk of opportunism by reducing information asymmetry. Besides, interaction lets partners recognize another's skills and expectations and influences formal coordination through creating standardized communications and routines, (Jones et al., 1997). Finally, institution-based trust is anchored in institutional controls such as the legal forms and societal norms and values which are related the relationship.

3.3 Relational vs. Contractual Governance

To be able to measure governance structure we require the constructs of proxy variables, or scale development. For this purpose, Zhang and Aramyan (2009) proposed the constructs of contractual governance and relational governance, where the former refers to any agreements (both written and oral) reached by parties to reduce risk and uncertainty in exchange relationships and the latter is defined as parties' informal embedded relationships and social norms. As they state, contractual governance in fact refers to the hard, explicit and formal sides of relationships, while relational governance addresses soft, tacit and informal side. Zhang and Aramyan's approach to relational governance comprises trust and cooperative norms.

A controversial question in the interorganizational relationship literature is whether relational governance (trust) is a substitute or a complement for contractual governance (Dekker, 2004) .

From substitutive relationship view trust and contractual governance are inversely related which means as trust increases less contractual governance is required and vice versa. When, for instance, a firm has a reputation for being trustworthy, its partners may choose to use less contractual governance compared to a firm with a less favorable reputation. Ouchi (1979) argues that since trust lessens goal disagreement, less contractual governance is required to avoid opportunism, as partners tend to behave in interest of each other. Das & Teng (1998) believe that applying contractual governance signals one's trust in another and using highly contractual governance reflects lack of belief in one's goodwill or competence which negatively affects relational trust.

But from complementary relationship perspective, trust and contractual governance are additively related which implies an increase in the level of either trust or contractual governance conducts to a higher level of confidence (Das & Teng, 1998; Poppo & Zenger, 2002). Poppo & Zenger (2002) argue that application of contractual governance can improve a trusting relationship, through minimizing the domain and severity of risk.

Dekker (2004) concludes from the above arguments that this relationship may actually be nonlinear. He argues that until a certain level of control which is suggested by the transaction hazards, contractual governance maybe complementary and enhancing to trust, but since trust is the low-cost solution, it may substitute contractual governance whenever adequate level of control is achieved. This argument is supported by the notion that partners will not pointlessly prefer using expensive formal control mechanisms, and risk destroying their relationship quality. This means that relational trust is vulnerable to application of contractual governance when its use surpasses this threshold.

3.4 Control and Coordination Dimensions

The main motivation for governance can be explained as providing the conditions that motivate partners in interorganizational relationship to fulfill outcomes. This argument suggests that controlling transaction risks is just part of the governance concerns in the quest of desirable outcomes. When partners cooperate to gain mutually beneficial outcomes through value creating activities (Dyer & Singh, 1998), Dekker (2004) argues that TCE's challenges regarding value appropriation only addresses part of concerns in interorganizational relationship. Partners share resources and decide on a division of labor and tasks to be done, to create value. The consequent interdependence between the subtasks then requires being coordinated across the firms' boundaries. This implies that the other driver for governance in interorganizational relationship is coordination of interdependent tasks between partners (Dekker, 2004).

Mesquita and Brush (2008) argue that these two aspects come from basically different origins. Control is anchored in divergence in both motivation and interest, while coordination derives from the cognitive limitations of individuals. Based on this argument, Lumineau and Henderson (2012) distinguished between contract control function and its coordination function. This approach to studying contractual governance (Puranam and Vanneste,2009) let us address more effectively how and when contractual and relational governance interact. For instance, Malhotra and Murnighan (2002) argue that contracts diminish trust, but Mayer and Argyres (2004) mention that contracts and relational dimensions are complementary. This difference reveals that they have focused on different dimensions of contract. While the former argument's focus is on control function of contract the latter's focus is on coordination function.

3.6 Plural Structure

Williamson (1985) proposed that optimal governance structure comprises a discrete choice among the three alternatives: vertical integration, hybrid forms or market. However Bradach & Eccles (1989) doubted such a notion by suggesting a continuum of non-mutually exclusive organizational forms between market and the hierarchy forms which are organized by authority, price and trust mechanisms;. Although this view might look same as that of Williamson's (1996) and Menard's (2004) relative to hybrids, an implication of Bradach & Eccles (1989) argument is that transactions could be embedded into other transactions. In other words, for the first time they introduced the notion of plural forms as "an arrangement where distinct organizational control mechanisms are operated simultaneously for the same function by the same firm ( Bradach & Eccles, 1989). Plural governance structures are found in many current organizations. Universities have long been founded on a plural governance structure, as faculty move between teaching (hierarchy) and research (community) (Boudreau et al., 2007). Parmigiani (2007) revealed that companies working in the tooling industry both made and bought metallic components. In the agribusiness scenario, Mello & Paulillo (2010) found that orange growers traded their product through both contracting and on the spot market. In all the aforesaid instances a single transaction is governed by two or more organizational mechanisms which is in contrasting with the theoretical approaches developed based on Williamson's approach to optimal governance structure.

By extending the concept of plural structure discussed above to buyer-supplier-relationship in context of social responsibility, we argue that economic and social dimensions of a relationship could also be governed through separate mechanisms (Fig. 3).

Economic Governance Structure

Social Governance Structure

Fig. 3 Buyer-Supplier Governance Structure

This argument of course does not imply that the structures of the both mechanisms are independent. Both structures have common antecedents such as goodwill trust that cause them to be correlated; however some other antecedents may be exclusive to the structures. The motivation behind distinguishing social dimension of the relationship between buyer and supplier from its economic dimension is that it let the governance mechanisms be better aligned with the dimension specific attributes. Dyer and Singh (1998) argues that the ability of exchange partners to fit governance structures with exchange attributes is essential for realizing "economizing advantages."

With respect to the above discussion the major focus of this research is the social dimension of governance structure in a buyer-supplier relationship. Fig. 4 represents the conceptual model of the antecedents of social governance structure.



Social Governance Structure

Controlling Structure

Coordinating Structure


Cultural Distance

Perception of Social Opportunism

Coordination Requirement

Cost Pressure

Reputation Sensitivity

Bargaining Power

Formal Institutions

Antecedent Moderators Problem Power Governance Structure

Coordinating Structure

Fig. 4 Conceptual model for social governance structure

5. Propositions

5.1 Goodwill Trust

Goodwill trust and contract are main control mechanisms that decrease risk of opportunism and lubricate cooperation in a partnership (Lui and Ngo, 2004). According to Das and Teng (2001), contract and goodwill trust are replacement for each other. Goodwill trust lessens perceived relational risk by adding confidence in a partner's willingness to accomplish their responsibilities (Das & Teng, 1998). As confidence in a partner's good faith develops, partners cooperate further, share more information, and feel more committed to each other (Fryxell et al., 2002). Uncertainties regarding the supplier opportunism are diminished by goodwill trust or contract. Opportunistic behavior comes from the transaction cost literature, and is defined as "Self-interest seeking with guile" (Williamson, 1975). In context of social responsibility we conceptualized opportunistic behavior as taking advantage of information asymmetry between buyer and supplier, and cutting costs or earning benefits through betraying the social and environmental commitments. Goodwill trust hence decreases the impact of installing contractual mechanisms to protect against opportunism (Yan & Gray, 2001). If one trusts the goodwill of one's partner, then fewer resources are required to plan and monitor the formal contract. On the other hand, when the goodwill of a partner cannot be trusted, one is probable to set up further ex ante contractual safeguards as monitoring mechanisms to make sure that the enough confidence level will be met.

5.2 Cost Pressure

As an industry's life-cycle moves to maturity phase, prices drop and the production technology becomes dispersed. Firms then chase savings, by sourcing products from developing countries. Globalized industries utilize their competences to build up multiple supply sources; and therefore, capitalize on lower labor costs. Strong rivalry reduces retail prices and margins, enforcing the firms for more cost reduction. Park-Poaps and Rees (2009) found that cost pressure may conduct suppliers to behave socially irresponsible. Van Tulder and Mol (2002) point out that a potential problem may arise when buyers primarily follow price minimization policy. Fynes and Voss (2002) mention when the only concern of the buyers is getting the right quality product at the right price, suppliers are concerned with supplying the right quality product at a profitable price. This price pressure may be transferred to the workers through reducing investments in working conditions, employing low-cost workers or minimizing workers' benefit (Arnold and Hartman, 2005). Lam (2009) argues that business approach is one of obstacles for behaving socially responsible in China. Companies in China are generally recognized as low-cost manufacturers and barely care about labor conditions (Lübcke et al. 2007). Schneider and Schwerk (2010) found that business attitude is one of the main challenges for practicing social responsibility in China. While pursuing short-term objectives are widespread practice in Chinese firms, the positive outcomes of behaving socially responsible emerge only in the medium or long term. Therefore, the supplier has to deal with a conflict of objectives. Under this condition behaving opportunistically would be more likely. Hence we have the following proposition:

5.3 Cultural Distance

Difference in cultural hampers trust, since shared values, norms, and patterns of behavior (cultural elements) are the foundations for the trust emergence (Lewicki & Wiethoff, 2000; Sitkin & Roth, 1993). When a partner is perceived as dissimilar along one of the key cultural elements, uncertainty toward that party behavior rises, because it is considered as operating under dissimilar assumptions and values (Bjorkman, Stahl, & Vaara, 2007; Sitkin & Roth, 1993). Rao & Schmidt (1998) state that cultural distance weakens the richness of communication contacts (Katsikeas et al., 2009) due to unlike frameworks for messages interpretation. Complexity and confusions driven by limited communications and misunderstanding between culturally distant partners tend to hinder both development and maintenance of relational arrangements. In comparison, contractual mechanism provides a framework which defines the relationship by clarifying the rules, obligations, and responsibilities of the exchange partners in a relationship (Abdi, 2012).

Since a socially responsible operation requires extensive coordination among conventionally unconnected parts of the chain, we have the following proposition:

5.4 Power

Contracts, perfect or imperfect, are ineffective, if could not be enforced (Pederson and Anderson, 2006). The literature review shows that buyer's bargaining power, suppliers' sensitivity to reputation and formal institutions are three sources of power in buyer-supplier relationship.

5.4.1 Reputation Sensitivity

Seuring and Müller (2008) argue that one of the motivations behind compliance with social responsibility is limiting potential reputation losses. Incompliance with labor, environmental, health and safety norms may conduct to security and sustainability risks and may also cause reputation losses (Roberts 2003). Welford and Frost (2006) found that risk reduction was the major driver for corporate social responsibility measures in the supply chain. Western focal firms cannot tolerate to be considered as firms which mistreat their employees or destroy environment. Bad publicity can negatively affect on reputation and may damage brands (Millington 2008), particularly, in B2C business models where good brand and image are essential for success in the market. The reputation of a supplier can be considered as a resource that affects future earnings (Koch, 1995; Bensaou and Anderson, 1999). For example if a supplier behaves opportunistically, the buyer may not involve in future transactions. Besides, the buyer may inform other firms that the supplier is not a reliable partner. Reputation can bring strong power to supplier, when the supplier can take advantage of future transaction with the buyer and the buyer can hurt the supplier by communicating non-compliance to other relevant actors, for example in business networks(Pederson and Anderson, 2006). Granovetter (1985) states that since dyadic relationships are often embedded in a broader network of supplier-buyer relations, such social embeddedness provide a powerful incentive to limit opportunistic acts.

5.4.2 Formal Institutions

Campbell (2007) claims that when strong regulations are in place, firms will more likely behave socially responsible. He also states that institutions not only enable but also constrain socially responsible behaviors through rewards and sanctions. Visser (2008) found that corporate social responsibility was less practiced in developing because of poorly developed legal frameworks.

Formal institutions have an important role in effective performance of the market mechanisms enabling the firms to involve transactions without being imposed to unnecessary costs or risks (Meyer et al., 2009). Transaction cost economics (TCE) and new institutional economics both refer to the impact of formal institutions in the conduct of economic transactions (Abdi, 2012). According to TCE literature, firms interacting within an environment with distant formal institutions deal with two main challenges: the comprehensiveness of the formal institutional frameworks with respect to the obligations and rights of parties, and efficient enforcement of the contracts (Oxley, 1997).

When the institutional frameworks are not complete regarding some aspects of the exchange partners transaction (or are considerably different across the institutional environments in which partners are residing), partners may be motivated to remedy the shortcomings through governance mechanisms (Joskow, 1990; Luo, 2005).

For instance, social responsibility conducts usually include issues that are beyond the legal requirements, and in consequence non-compliance with codes does not necessarily mean noncompliance with the institutions in place. In other word legal enforcement of social codes is difficult in countries with distant formal institutions.

5.4.3 Bargaining power

Direct sanction is one of the mechanisms that buyers can employ to enforce contract when supplier's non-compliance is revealed. The quickest and most ultimate sanction is cease the relationship. However, this policy has some limitations. Most notably, the buyer's ability to cease an agreement depends on the bargaining power of each party in the relationships. Bargaining power derive from the control of critical resources or processes, firm's share in value added to the product or the relative size of the partner and ease with which a company can share information within a supply chain (Handfield and Bechtel, 2002). Exit is only pertinent as a safeguard, if it is feasible and effective. This implies that the threat of exit has little impact, if the supplier's products and services are critical for the buyer. On the other hand, the supplier has strong motivation to respect social conducts, if the future of the company depends on continuous co-operation with the buyer (Buvik and Reve, 2002). Koch (1995) argues when non-compliance is unlikely to go undetected, direct sanction can be a very efficient safeguard, provided that buyer is the dominant partner in the relationship, otherwise the buyer might envision more slight mechanisms to lessen the opportunism concerns.

According to agency theory, the principal should give agent incentives to persuade him to comply with his interest (Koch, I995). Pederson and Anderson (2006) suggest the following five incentives: Compensate the supplier for costs related with social responsibility compliance, Reward the supplier for complying with social responsibility compliance, Invest jointly with supplier in transaction specific assets, Refer to the strategic potentials of behaving socially responsible, Involve the supplier in the planning and implementation of the social responsibility conducts

With respect to the above arguments we have the following propositions:

Proposition 1: Trust unchanged, the higher the cost pressure on the supplier, the more contractual governance structure will / should likely be adopted to control supplier's compliance with social values.

Proposition 2: The higher the cultural difference, the more contractual governance structure will / should likely be adopted to coordinate supplier's compliance with social values.

Proposition 3: When power is low, the lower the trust governance, the more incentive will / should likely be given to the supplier to warrant supplier's compliance with social responsibility.

Fig. 5 provides a graphical representation of proposition 1 and 3.

Fig. 5 Graphical representation of proposition 1 and 3

6. Case Study

On January 23rd, 2010 a 19-year-old young worker committed suicide by jumping from a building at a factory in Shenzhen, a Southern city in China. This happening attracted everyone's attention to the conditions of low-skilled labor and migrant workers. Before 2010, several suicides had occurred at Foxconn, at least two in 2007 and two in 2009. One of victim in 2009 was diagnosed with depression because of the tough working conditions and the other committed suicide for being punished for losing a prototype of Apple's 4G iPhone.37 Employee mistreatment in Foxconn brought to attention for the first time in 2006, when a UK newspaper explained the low wages, long working hours, and tough working conditions at Foxconn plants witnessed by the journalists. The continuous series of suicide boosted in 2010 brought Foxconn into the center of the public attention. Three people jumped from their dormitory buildings in March followed by two more in April. A survivor confirmed that the reason was "too much work pressure. In May, another six jumps occurred. By the end of 2010, the number of attempted suicides reached 17 with only survivals.

6.1 Electronics Manufacturing Services (EMS) Industry

Electronics Manufacturing Services (EMS) providers, produce for Original Equipment Manufacturers (OEMs) as strategic supply chain partners. More than 60% of revenue in EMS industry was earned in the Asian region. Emergence of the new destination for EMS such as India, Vietnam and Malaysia threatened China's market share. In this very aggressive environment, firms ran at very small margins. EMS providers normally competed in terms of the price rather than on manufacturing and quality basis and both suppliers and customers had high bargaining power. While OEMs took advantage of a growing number of choices of EMS providers and increased price pressures, EMS providers were often forced to pick among a limited OEM-approved list of vendors. It was approximated that OEMs could make a gross profit margin of 50% to 60% , while Chinese EMS had an average margin of only 3%.

6.2 Foxconn

Founded in 1974, Foxconn is the leading and fastest growing company in the Electronic Manufacturing Services (EMS) industry. Among Foxconn customers there are many well known brands such as Nintendo, HP , Motorola, Nokia, Sony, Dell and Apple. By end of 2010, Foxconn was in business with Apple for 5 years, as the sole manufacturer of iPhone. With respect to 50,000,000 unit sales of iPhone in 2010 and a profit margin of $7 per iPhone, [2] Foxconn profit was estimated to be 350 million dollars in 2010. Foxcon income surpassed $60 billion in 2009 that was 26% of the total EMS market. Foxconn has a vertical integrated one-stop-shopping business model. This business model together with low labor cost in China has enabled Foxconn to afford offering competitively low price. About 800,000 employees were employed in Foxconn and its subsidiaries by 2010.

6.3 Foxconn Employees

A survey on 2010 showed that the average age of Foxconn workers was about 21, while the youngest was only 15. Few of workers had education beyond high school, while most of them were migrants from other provinces. During the past decade the number of migrants had risen significantly. From 1995 to 2000 about 100 million Chinese living in rural area migrated to cities. Employers such as Foxconn preferred this huge population of migrant as a lower-cost source of labor than local workers.29 According to Global Wage Report , in comparison with local workers, migrant workers were twice more likely to be paid low wages. Discrimination against migrant workers was a common practice in China. Urban residents tended to see those of rural origin as inferiors and indeed were satisfied that benefits were not granted to the migrants.

The 2010 survey also showed that the average living costs of a typical Foxconn worker were about $160 per month. This amount was enough for workers to survive, however they had little hope of saving enough money for mortgage or handle any potential health issue. While the pay seemed not enough from a developed-world view, many workers desired to join Foxconn. In comparison to other smaller manufacturers that often were not able to pay their employees on time or in the promised amount, Foxconn was among the best choice of employment for low-skilled workers. The employees were provided with legal contracts, received subsidies for housing, meals and insurance, or could choose to live in company dormitories rent free.

6.4 Labor Practices in China

In 2010, China faced the need to create 100 million new jobs by 2013, while it was under pressure to enhance the work conditions to the standard level. Increasing labor wages to keep pace with the inflation in China considerably endangered its competitive advantage. This threatened companies such as Foxconn that endowed a lot of employment opportunities, and were strategically critical for the welfare of Chinese society. Besides, labor practices were weakly regulated and enforced in China, while establishment of independent labor unions was not allowed, the authorized organizations were essentially too weak to protect workers. On March 20, 2006, China's National People's Congress proposed a new Labor Contract Law, which was finally enacted in January 2008, in order to prevent labor abuse and mistreatment.

6.5. Analysis

With the review of the information provided in above case study and using the proposed model in this section we attempt to explain why the structure Apple adopted to govern its relationship with Foxconn and analyze how the situation led Apple to adopt this approach to warrant socially responsible operations.

Trust: High

Foxconn and Apple success was highly forged and carved together. By 2010, Foxconn had been in business with Apple for 5 years, as the sole manufacturer of Apple's iPhone and other products. While dependence on iPhone market and image of being iPhone's sole manufacturer attached Foxconn to this relationship, Foxconn's high technical and manufacturing capabilities together with its low price made it irreplaceable for Apple with respect to huge iPhone output.

Cultural distance: High

Foxconn's social responsibility culture was obviously different from internationally accepted norms and Apple standards. Low wages, long working hours, and tough working were completely in contrast with Apple's social values and indicates high cultural distance.

Power: moderate (based on the following judgments)

Formal institutions: Weak

The case also explicitly states that labor practices were weakly regulated and enforced in China. Establishment of independent labor unions was not allowed and the authorized organizations were essentially too weak to protect workers.

Reputation Sensitivity: High

From reputation perspective, Foxconn was definitely susceptible. This notion is supported by the fact that most of the Foxconn's customers were the big names who concerned being socially responsible. Besides the fact that Foxconn's behavior was not ignored by the stock market and its stock price dropped by 24% in 2010 supports the argument that Foxconn was susceptible to reputation.

Bargaining Power: Low

Although Foxconn is dependent to Apple's market and image, for Apple Foxconn replacement would not be easy and need a lot of time to set up the details, including the necessary manufacturing customizations. The time in between would cause delay in production, which in turn undoubtedly would affect profits. Besides a major key characteristic of this relationship was the confidential information like product designs, product as well as overall business strategy including new prototypes that had possibly been shared or discussed. This implies that the parties were involved in a symmetric form of dependence which did not let either of the parties to practice power in their relationship.

Cost Pressure: High

The EMS market was very competitive and profit margin was extremely thin. When Apple was enjoying a 39.4% gross margin in 2010, Foxconn's margin was 8.10%. Therefore Apple's aggressive pricing passed the pressure all the way down to Foxconn's employees.

With respect to the above judgments and the propositions, we argue that control should be moderately contractual (proposition 1), while coordination structure should be highly contractual (proposition 2). This prescription is definitely different from general remedy of cooperation (relational governance) advice that may derive from level of the goodwill trust between Apple and Foxconn.

8. Conclusion and research opportunities

The review of the literature shows that adopting a collaborative approach to managing social responsibility in the supply chain has been broadly recommended by the scholars; however emergence of new social responsibility scandals shows that this approach can not address the concerns. So this research represents a conceptual model and identifies antecedents of governance structure in socially responsible relationship between buyer and supplier. The research looks at the problem from buyer's perspective assuming that focal buying firm is socially responsible.

We discussed that adopting separate mechanisms for governance of social aspect of relationship may increase its fitness to the aspects of the relationship. In this research we also argued that while goodwill trust defines the controlling aspects of governance structure, social responsibility culture determines the structure of coordinating aspect of the governance.

The research also indicated that goodwill trust is the main determinant of social opportunism perception which is the driver of control mechanism. Trust impact on social opportunism is moderated by some exogenous variables such as cost pressure. We also mentioned that cultural difference is the main antecedent of coordination structure. These arguments conducted us to three following propositions:

Proposition 1: Trust unchanged, the higher the cost pressure on the supplier, the more contractual governance structure will / should likely be adopted to control supplier's compliance with social values.

Proposition 2: The higher the cultural difference, the more contractual governance structure will / should likely be adopted to coordinate supplier's compliance with social values.

Proposition 3: When power is low, the lower the trust governance, the more incentive will / should likely be given to the supplier to warrant supplier's compliance with social responsibility.

This research contributes to the relevant literature by providing insights into dynamics of governance structure design in context of sustainable supply chain management through raising the argument of separating social and economic dimensions of governance structure, and determining the antecedents of the choice of governance structure for aspect of buyer-supplier relationship.

An opportunity for future research could be to test empirically whether plural mechanisms (separate economic and social mechanisms) positively affect the fitness and consequently effectiveness of the governance structure. This research can also be extended by empirical test of the conceptual model and the proposed relationships between the construct. While we identified cost pressure as the main moderating variables, study of the impact of other potential moderating variables such as transparency, task complexity and network structure on choice of governance structure can be considered as another research opportunity. Finally another opportunity for research could be optimization of the contractual-relational level of the governance through mathematical modeling of the problem where the objective is minimizing governance cost. This requires measuring the governance as well as other constructs such as power, cost pressure, trust and cultural distance and estimation of their impact. Besides, the transaction costs and fixed investment costs corresponding to contractual and potential incentive are needed to formulate the objective function. In addition the risk, of punishment by consumers or others driven by imperfect structure should also be realized in the mathematical formulation.

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